Sunday, May 18, 2014

2 kinds of bitcoin, defined and discussed

The first thing to know is that there are 2 “bitcoins”. 

The first is bitcoin the software program and the second is bitcoin the actually tokens of money being exchanged.

As far as the software platform goes.  It is really interesting.  Checks take days to clear.  Credit cards may take weeks for a merchant to get their money.  Paypal has its delays too to make sure the consumer is happy.  The bitcoin software takes 10 minutes or less to process a transaction and it is irreversible.  Credit cards charge merchants 5%, the Ebay/Paypal can go even higher.  The bitcoin software can send bitcoins anywhere in the world, any amount, for 5 cents.  People have made transactions for millions of dollars and it cost them just pennies.  The software itself if implanted correctly by end users is extremely reliable and very safe.  That is a big “IF”.  To use the software correctly is actually quite complicated and not something a normal person can do well or easily.   It involves many steps of making sure things are set up just right.  When all that is done, sending a transaction is no more complicated really than sending an email.  The part of sending the money is actually incredibly simple.  It does this all through a decentralized system.  The benefit of this means that no one person or group can control it.  The software, much like “email” doesn't really exist in one place or can be controlled by one entity.  There are very big providers of email, like gmail and yahoo, and bitcoin has those too, but anybody that wants to be an email provider and jump on the email bandwagon can do so and nobody can really stop them.  Bitcoin software is a little like that, but much more friendly towards a home user.  It is impossible for a person to download on their home computer every email that has ever been sent by every person on Earth, but with bitcoin, that is indeed possible.  A person can download every transaction that has ever been made.  Right now the file is about 10 gigs and is growing.  This file is called the “blockchain” and it shows exactly how every transaction has been connected to every other transaction.  The blockchain is updated every 10 minutes when a new round of transactions are cleared.  The beauty of this system is that it is impossible the cheat.  You can know if I have money to send you, and have sent it to you for real because the blockchain will tell you. We can also both see clearly when it arrives.  And likewise I know that you know and therefore can't really cheat you.  And furthermore you know that I know that you know...... and so on.   So the whole system is very transparent and both parties can work from the assumption that the other party is a knowledgeable party to the same information and therefore everyone can act rationally.  The software is built upon heavy encryption, so deeply encrypted, you would be far more likely to count all the stars in the universe than to crack it.  Seriously.   So the bitcoin software program is a method of sending value that is in a few distinct ways far better than the any of the major methods of transferring money, but it is also in some ways complicated to use.  Many big companies have invested millions of dollars into making this simple, just as simple as sending an email, or in the future even as easy as sending a text message.  That has not happened yet, but there is definitely an arms race to get there first.  To some extent it is just a matter of writing code since the whole thing lives on the internet.  To that extent, it can all be overcome.  It isn't exactly that easy, but I expect before 2016 it will have been simplified for the end user so much so that pretty much any smartphone user could use it and apps will have been designed in a way that they can't really be used incorrectly. 

Bitcoins themselves are harder to understand and this is where most of the attention is focused on in the news.  In part because their price has fluctuated, or the bitcoins have been lost or stolen.  It is still hard to define just exactly what a bitcoin is, and the bitcoin community seemingly still hasn't decided.  Many people argue it is like digital gold, and many people argue it is like digital cash.  In reality, it has things in common with both of these and has differences with both of these.  Right now, I think both of those camps are wrong.  Right now, to me bitcoin is no more than digital bling bling.  For the amount of bitcoins actually being used to purchase things, it is highly overpriced, maybe by more than a couple of zeros.  That being said, any bitcoin is worth what another person is willing to pay for it.  It sounds over simplified, but a bitcoin is worth what it is worth.  It can't really be said anymore simply than that.  The price right now is being driven up on two principals as far as I can tell.  The first is that a lot of nerds think it is beautiful.  They love the way it is decentralized.  They love that it cannot be counterfeited, that it cannot be stolen (if used correctly), and they especially love that no country has control over it, that nobody has control over it in the same way that nobody really has control over email.  Yes, a long time ago some programmer invented the code for email, but that programmer can no more now shut down email than the creator of bitcoin can shut down bitcoin.  So some people think since the creator can’t change it anymore, then it doesn’t matter who created it.  But in fact it does matter A LOT because the inventor has way more bitcoin than anybody else, in fact so many bitcoins, the creator could probably crash the whole system if so desired.  Since it is easy to tell every transaction and any decent computer geek can do this, it is very well known which bitcoins are the creators and in which bitcoin wallets they exist.  Those bitcoins are being heavily watched and ironically to this day, not one has ever been spent.  Speculation runs wild why this is, but the level of intelligence and work that went into creating this, means the creator probably didn't do it to get rich, but because they believed in a money not controlled by any country or company, but instead by the people who hold it. 

So the bitcoins themselves don't really exist anywhere, but they exist everywhere.  A copy of my bitcoin exists out on the web as a bit of encryption on the blockchain being held on tens of thousands of people’s hard drives.  I can throw my computer away, and as long as I still have the encryption key written down somewhere I can unlock this easily at any time.  Again, a person might as well try to accurately count the stars in the universe before they could unlock my bitcoins as it would in reality be a much simpler task.   Bitcoins are a little like gold because they are “mined” by people using their computers to try to find them.  They aren't really found, not like a person finds gold in the ground, but instead are given away more in a lottery like fashion.  Every ten minutes 25 bitcoins are awarded to a person's computer who has won the lottery.  A person's computer can win the lottery by having the most lottery tickets, and to that extent the person with the biggest computer wins more often, but just like any lottery, even a person with a small computer could in theory beat out a person with a big warehouse and this has and does happen.   These people that have their computers connected to the internet are the computers processing the transactions, they are registering and recording the transactions, the computer that wins the round and wins the 25 bitcoins will make a new official entry into the blockchain of all the transactions it is clearing and then that message is sent out to all the other computers with blockchains and they add those entries.  All this is done by complicated math, physics, and cryptology.  It is regulated by science and can't really be broken or manipulated.  (Until it is)  It is an open source software program.  Anybody can download it and examine it and yes, try to hack it.  If they do hack it, everyone will instantly know and quickly a patch will be made to protect against the hack.  At this point, the people looking at the software don't hack it, because to hack it and steal the bitcoins would mean that it wouldn't be worth anything anymore and so to steal it would make it not worth stealing.  Instead when a hacker finds a fault in the code, he submits it to the community.  Big investors with a lot of bitcoins then usually give said person a huge reward in bitcoin for having done so.  So by finding a flaw, it is actually in the hacker’s best interest to try to fix the flaw instead of exploit it.   This is completely different than real cash.  If I find a way to steal money from a bank, I could keep the money and be rich (if I wanted to be a hacker/bank robber) and as soon as I stole the money it would still be worth a lot, not worthless.  So far this system has been working quite well and most of the flaws have been worked out.  What happened with Mount Gox where all the bitcoins were stolen was that a known and published flaw wasn't being protected against specifically by the Mt. Gox company.  The Gox programmers were being lazy and trying to speed up transactions.  Most of the other bitcoin companies were not doing this because they knew that it could be a problem.  Gox was being sloppy and their bitcoins got stolen.  But in some ways, it was the owners of the bitcoins that were at fault too.  They had literally given all their bitcoins to Gox to hold, instead of holding them on their own computers.  To be fair, I also don't hold my bitcoins on my computer either.  I use Coinbase.  It is as easy as logging in and sending an email, and I think Coinbase knows what they are doing and weren't at all affected by the same problem Gox was affected by.  (until they are)

Many people are anti-government and believe the government is printing too much money.  The government is constantly printing and printing new money.  And every time the government prints a new dollar, it makes the dollar I own worth a little less because now the dollar I own is a little less special.  If the government prints a ton more money, then my dollar is a ton less special.  Right now most of the governments of the world are printing a ton more money to balance their budgets.  The governments are in debt and instead of earning money the good old fashion way by earning it, they just create money out of thin air and use that money to pay off the debts.  (We call that raising the national debt.) The United States is a particularly bad offender and that is why the debt is at unprecedented rates.  Many geeks think bitcoin is beautiful because nobody can just decide to print more bitcoins making old bitcoins worth less.  So geeks feel like their money is safe.  If I own a couple of pounds of gold, and a huge new gold mine is found under the Ocean that just goes for miles, the gold I own will be worthless.  All the gold in the world could fit in any high school's football stadium.  A truly large mine would make the current world's gold supply worthless.  The same with governments just printing money.  At least with bitcoin, a person knows exactly how many bitcoin have been created and exactly how many will be created and so can kind of guess all things being equal what their bitcoins should be worth.  Not all things of course are equal.  The price is heavily speculated on.  Geeks think bitcoins are beautiful the same way a rapper thinks gold chains are beautiful.  That rapper pays far more for the chains than the actual real value of the gold, far more.  Likewise, many believers in the payment aspect of the bitcoin software feel like it is a very forward thinking system. They have speculated on the price of bitcoins assuming that someday as a successful payment processing system those bitcoins will actually be valuable other than just as geek bling bling.  Right now bitcoins are neither really gold or a currency, falling short of both.  Still in some ways bitcoin has the opportunity to be the best of both.  It is just so young now.  

More and more people live online with facebook and twitter and all the other sites.  Many people couldn't understand how a website that lets you send messages to your friends and post pictures could be more valuable than a car company, but it is.  Still... our money remains old money, based on the old way of holding value, except it’s not.  Dollars used to be backed by gold.  For hundreds of years every dollar the US printed was worth a chunk of real gold in a real place somewhere, that was until Nixon.  Now a dollar is worth a dollar, just like a bitcoin is worth a bitcoin.  But bitcoins live online, in the cloud and on people's hard drives much the same way our Facebook profiles, Skype phone calls, forums, blogs and newspapers do.  It is a new way of thinking about money, about creating money, about transferring money, about valuing money that it is a total paradigm shift from anything that any human culture anywhere has known.  Seriously.  It is also for this reason hard to explain and have people get their heads around. They think in terms of paper money and credit cards, and bitcoin is far different from these. The implications of this cannot yet be known.  It is like watching a baby grow.  It might not make it.  I might very well fail.  Or it might find a place in the world as a way of having and sending money.  I seriously doubt it won't take over the financial system anytime soon if it even ever does, but I think it is a unique enough idea and brings many things to the table that it can at least find some kind of niche.  Whether that niche is big or small, I don't know, and doubt anybody that says they do.  So far the niche has most famously been for scams, buying drugs, internet porn, and gambling.  In some ways mirroring the birth of the internet itself.  As we know, the internet eventually grew into something much bigger though than any of these things.  It is a dirty and nasty aspect of bitcoin, but it is also in some ways justifying it.